Starbucks Brews a New Strategy

In the physical world, Starbucks seems to be everywhere. Two years ago, its leaders hoped to build an equally strong presence on the Internet. Now they're trying to reach customers with a more modest blend of Net-related offerings.

By
George Anders

Visit the Starbucks Web site, and your hosts will gladly tell you about a coffee bean's long journey from a Kenyan plantation to your neighborhood cafe. But there is an equally intriguing odyssey that may never be recounted on the site. That's the story of Starbucks's own relentless quest to use the Internet to connect with its customers.

In 1998 and 1999, Starbucks moved boldly, acting as if the Internet presented a can't-miss opportunity. Then the company stumbled again and again, as high-profile initiatives led to costly write-downs. Now Starbucks is pursuing what may be its wisest online strategy yet. No longer is the company trying to redefine its business in radical ways around the Internet.

This time, Starbucks is tying its online efforts closely to its central mission: building customer loyalty around cappuccinos, lattes, and other fancy beverages. "We aren't in the business of selling Internet access," says Darren Huston, senior vice president for new ventures. "Our job is to sell more coffee."

On its Web site, Starbucks now runs a simple, easy-to-use store that sells coffee beans, mugs, brewing machines — and not much else. Gone are the dreams that the company once harbored of involving itself in the online merchandising of everything from furniture to videocassettes. And while the company is currently rolling out high-speed wireless connections in its physical stores, it's doing so in a way that minimizes any disruption of the traditional cafe experience.

Starbucks executives hesitate to put their strategic overhaul into a broader context. But the lessons that they've learned aren't hard to see. Customer loyalties can't be stretched or transferred overnight to a new product or channel — no matter how tempting it may be to sketch out such ambitions on a whiteboard. Eventually, the Internet may reconfigure how customers think of mass-market brands. But that shift will take years to unfold, and company leaders need to manage the transition with great skill.

It's easy to see why Starbucks found itself dreaming big at the height of the Internet boom. Its cafes attract young, affluent, tech-savvy customers — exactly the sort of people who made that boom take off. In 1999, Starbucks estimated that 70% of its customers were Internet users. Today, that figure has risen to 90%.

Starbucks chairman Howard Schultz also had an insider's view of the Internet's potential. In mid-1998, he joined the board of eBay, shortly before the online-auction company made its highly successful IPO. In early 1999, he spoke glowingly about the potential to leverage the Starbucks brand in cyberspace. People go to coffee shops to chat, he noted. People go online to chat.

Shouldn't it be possible — and profitable — to combine those two habits in some way?

But as Schultz spelled out his vision more explicitly, Wall Street shuddered. In June 1999, Schultz talked about setting up Starbucks X, a quasi-separate division that would be built around the Internet. A month later, Starbucks reported disappointing quarterly results from its real-world stores. Company officials say that the slump in business had nothing to do with Starbucks X or with any other Net-related venture. But the company's stock dropped more than 20% in a single day, and analysts widely urged Schultz to focus on his core business.

Smaller-scale Net initiatives followed, as Starbucks made minority investments in the online furniture retailer living.com, in the online chat service Talk City, and in Kozmo.com, a home-delivery company for Web shoppers. All three investments fared badly and led to write-downs.

Ironically, for all of their Internet enthusiasm, Schultz and other Starbucks executives moved gingerly with regard to offering Net connections in their stores. "Howard always said that he didn't want to create cybercafes," Huston recalls. "Think about what they're like. They tend to be dimly lit and isolating, with people hunched over machines. We didn't want that at all. We wanted to make sure that Starbucks stayed attractive to moms with strollers, as well as to people who were combining work and a coffee break."

Only in the past year have Starbucks executives begun to see a way to bring the Internet on-site without scaring away customers. Rapid advances in wireless technology mean that the company can now link customers to the Net without cluttering up the cafe environment with plug-in jacks and cables. Meanwhile, the proliferation of PDAs and affordable laptops means that Starbucks can now offer online access without installing lots of cumbersome computer gear.

So Starbucks has begun to provide high-speed wireless Internet connections in its stores — a move that stems from a wide-ranging wireless partnership that involves Compaq, Microsoft, MobileStar Network, and others. The new approach made its debut in Dallas on May 29 and will eventually reach 70% of the 2,700-plus stores that the company owns in North America.

"I get asked a lot, 'Aren't you concerned about people loitering in your stores, using the Internet, and not buying anything?' " Huston says. "The reality is exactly the opposite. Our most successful stores turn out to be the ones with the most loitering. We think it's great if people want to stay awhile. It creates a sense of community."

Meanwhile, Starbucks is learning to use its own Web site as a handy adjunct to its physical stores, rather than hoping to turn the site into a major profit center. The company's online store and its somewhat smaller catalog operation — together known as Starbucks Direct — account for 1% to 2% of total company revenues, according to Jim Nystrom, vice president of that operation. (Total revenues exceed $2.2 billion, so the combined Web-and-catalog business brings in $20 million or more each year.)

Starbucks Direct provides a welcome revenue stream, says Nystrom. In particular, it gives Starbucks a good way to sell such merchandise as espresso machines, which go for as much as $399 apiece, without having to stock every possible model and color in each store. But online sales are unlikely to be a huge growth area for Starbucks. "Bear in mind that our biggest-selling item in the stores is freshly brewed espresso," Huston remarks. "And you can't buy that over the Web."

That same focus on Starbucks's core business dominates Huston's thinking about what the company's wireless-connectivity initiative might achieve. Yes, Huston says, he will be watching to see how much revenue that initiative brings in. "But I'll be happiest," he says, "if people start telling us, 'I used to come in just for my morning coffee. Now that you've got Internet connectivity, I'm coming back for coffee and a snack in the afternoon as well.' "

George Anders (ganders@fastcompany.com) is a Fast Company senior editor. Visit Starbucks on the Web (www.starbucks.com).

A version of this article appeared in the August 2001 issue of Fast Company magazine.

Add New Comment

1Comments

One of the best marketing tools that Starbucks could have done was to acquire internet connections for their customers. Pretty soon we will be seeing that with all companies, ranging from online furniture to online magazine companies.